Friday, December 25, 2009

When I reviewed this 20/20 segment about the unintended consequences of the minimum wage for this post -- the final post for today -- I was reminded of a marvelous op-ed piece one of my former students at Hope College published in the Detroit News. Here's Adam Folsom's sad August 31, 2006 tale of being a minimum-wage casualty, in its entirety:

I am one of the first casualties of Michigan's new minimum wage law.

I am a 21-year-old economics major at Hope College who last year worked part-time at the college's Office of Career Services for $6 an hour. On Oct. 1, however, it will be illegal for the school to pay me an hourly wage less than $6.95 an hour. So my boss called me last week and told me that her budget was tight and, because of the wage increase, my job would be cut.

I would have liked to continue working at $6 per hour, and Hope College was willing to pay me that. But the state of Michigan says I do not have the right to work for that amount of money. Hope College and I are not allowed to negotiate a contract that is satisfactory to both of us.

In my study of minimum wages, I have concluded that minimum wage laws always cause unemployment among the very groups they are supposedly trying to protect.

Our nation’s first federal minimum wage law was passed in 1918 and applied only to women. Employers had to pay women in Washington, D.C., at least $71.50 per month for their labor. What happened next is that many women found themselves out of jobs.

One of the casualties of that minimum wage law was Willie Lyons who, like me, was 21 years old. She worked happily as an elevator operator at the Congress Hall Hotel. She had been paid $35 a month plus two meals a day.

When the minimum wage law passed, however, the Congress Hotel could no longer afford to keep her. She wanted to work at the old wage, just as I do, but the new law made that illegal. Instead, the Congress Hotel hired a man at $35 a day plus meals. Like me, Willie Lyons became unemployed by a "compassionate bill" supposedly designed to protect her.

The good news is that Willie Lyons regained her liberty of contract. She testified before the U.S. Supreme Court in Adkins v. Children’s Hospital (1923) and pointed out that she liked her job, her employers liked her, and she resented being ousted from her job by the new minimum wage law.

The Supreme Court agreed and struck down the federal minimum wage law (although a later court let such laws stand). In writing for the majority in the case, Justice George Sutherland wrote, "freedom of contract is the general rule and restraint the exception, and the exercise of legislative authority to abridge it can be justified only by the existence of exceptional circumstances."

Sutherland graduated from the University of Michigan Law School. I wish our Michigan legislators had studied Justice Sutherland before they passed a law that took my job.

I remember well the afternoon, during my Fulbright in Armenia, that one of my MBA students from the American University of Armenia came into my office upset and puzzled by something he'd been reading for my class.

He'd read two passages taken from a book called The New Protectionism by Tim Lang and Colin Hines. Opponents of free trade, Lang and Hines believe that global trade should be restricted in order to encourage greater regional self-sufficiency. Here are the passages:

"Trade liberalization hopes to bring more trade, yet more international trade brings more of the problems the world needs less of: threats to the environment, uneven spread of unemployment, and widening gaps between rich and poor, both within societies and between societies" (p. 3).

"Thus, the basic thesis of free trade is that instead of being self-sufficient, each one should specialize and produce what it is best at and can produce most cheaply, i.e., the things in which one has a 'comparative advantage' . . . This theory runs into difficulty where one country can produce products more cheaply than others, and has no incentive to trade, or where a country has little or no comparative advantage in anything" (p. 21).

While Armenia is an emerging former-Soviet republic, its relative poverty does not come close to the levels of extreme poverty one will find in places like sub-Saharan Africa. Yet this bright young man in my office simply could not believe what he was reading! In his eyes, the only hope for poor countries like his was greater openness, greater trade, and better access to markets. And as he had seen for himself already, some of the very best jobs in his growing nation were jobs created by foreign direct investment. He simply could not believe that there were comfortable Western "compassionate" writers out there like Lang and Hines who thought they knew better than he--a hardworking shopkeeper--what would be best for him and others in his emerging economy. How could they possibly know, he thought.

I was reminded of my conversation with my student Arthur as I watched this segment about sweatshop labor from 20/20. All of us comfortable Westerners need to remember that, no matter how noble our intentions, sometimes our hearts tell us to do something that may actually harm those we yearn most to help.

But even though none of the other diners gets involved, weighing their own personal benefits against costs, it turns out there is a bargain to be struck after all--though some are not happy about how things turn out.

The video raises many of the same questions considered in Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa by Dambisa Moyo. Publisher's Weekly says, "In this important analysis of the past fifty years of international (largely American) aid to Africa, economist and former World Bank consultant Moyo, a native of Zambia, prescribes a tough dose of medicine: stopping the tide of money that, however well-intentioned, only promotes corruption in government and dependence in citizens. With a global perspective and on-the-ground details, Moyo reveals that aid is often diverted to the coffers of cruel despotisms, and occasionally conflicts outright with the interests of citizens-free mosquito nets, for instance, killing the market for the native who sells them. In its place, Moyo advocates a smarter, though admittedly more difficult, policy of investment . . . . "

This is quite a different vision than that of Bono and economist Jeffrey Sachs, who think that we are all now smart enough to avoid our terrible aid mistakes in Africa during the last half-century. In The End of Poverty: Economic Possibilities for Our Time, Sachs argues that what Africa needs now more than ever is even more foreign aid, because we are now wiser than we have been about what to do with it.

The video segment begs to differ, and you will get to see Sachs defend his position in a rather contentious interview.

According to this report exclusive to NewsHour, a company called Not Your Daughter's Jeans has hit on a jean design that appears to insulate the demand for its product from fluctuations in consumers' incomes.

Christmas night is a night of new birth. Significant, unstoppable, world-changing new birth.

And if old Ebenezer Scrooge can choose a new path at Christmas, indeed there is hope for us all.

God bless Us, Every One.

'Spirit!' he cried, tight clutching at its robe, 'hear me! I am not the man I was. I will not be the man I must have been . . . . Why show me this, if I am past all hope?'

For the first time the hand appeared to shake.

'Good Spirit,' he pursued, as down upon the ground he fell before it: 'Your nature intercedes for me, and pities me. Assure me that I yet may change these shadows you have shown me, by an altered life?'

The kind hand trembled.

'I will honour Christmas in my heart, and try to keep it all the year. I will live in the Past, the Present, and the Future. The Spirits of all Three shall strive within me. I will not shut out the lessons that they teach. Oh, tell me I may sponge away the writing on this stone!'

By the way, Acton U is a fantastic program, and I would encourage anyone serious about bringing good intentions together with sound economics to consider attending.

At any rate, each summer that I give the talk it gets more and more interesting, given that Keynesian ideas appear to be winning the fiscal-policy day.

The Keynesian view is simply stated. When an economy is experiencing unemployment, the culprit is insufficient spending by consumers and firms. And because unemployment is real and painful, an appropriate role of government is to step in and start spending the taxpayers' money on goods and services, thereby raising demand. Facing increased orders, firms will begin calling back their laid-off workers.

Critics charge that Keynesian advice is a bad deal in the long run. Merely spending taxpayers' money on "stuff" to prop up a struggling economy will never correct what is fundamentally wrong with the economy. So we settle for short-term unemployment reductions in exchange for inevitable long-term damage. When Keynesian policy is used to stimulate the economy--as it is currently--we trust government to wager taxpayers' money on which industries will be "winners" and "losers" further down the macroeconomic road.

For example, who's to say whether propping up GM today is appropriate; it's possible (perhaps likely) that GM has no chance of long-term self-sufficient vitality. In the long run this really is a bad deal: keeping people busy at jobs that cannot possibly endure, while simultaneously inhibiting the longer-term growth and vitality of the economy by artificially creating demand today where there won't be tomorrow. This strategy also leads to bigger and (usually) badder deficits, as government borrows to finance today's spending plans.

Another danger that Keynesian activities court is the risk of inflationary spirals. Artificial increases in the demand for goods and services inevitably puts upward pressure on prices.

Keynes knew his critics were correct, and he famously confessed as much in his Treatise on Monetary Reform, in which he wrote, "In the long run we are all dead." For Keynes future consequences were irrelevant; we should help people who are hurting today because we have the power to do so, and ignore the future perils today's actions will bring.

Despite the myopia required to be a Keynesian, today we are vigorously pursuing a Keynesian course in both fiscal and monetary policy. And while there is little public debate these days over the merits and shortcomings of the Keynesian view, George Mason University economist Russ Roberts and award-winning director John Papola are producing a rap video in which Keynes and his free-market-minded nemesis Friedrich Hayek throw down. PBS's NewsHour covered Keynes and the video last night. Take a look: